Friday, January 20, 2012

Claiming Social Security Before 67 Costs Money

You may not know that participants can access Social Security benefits at age 62. About 40% of older Americans actually do claim benefits early. However, they do so at a reduced rate. The rate of reduction depends on these variables: Did the benefactor start claiming benefits just three years before full retirement age (when full retirement age was 65)? Or is their rate now based on as much as five years early (now that full retirement age is moving to 67)? Is the benefactor claiming on his or her own work history or on a spouse’s?

The percentage of reduction can amount to 25% or more. This reduction stays in effect even after beneficiaries reach full retirement age. If people end up living into their 80s and 90s, they will lose a substantial amount of money over time. If you started claiming benefits early within the last 12 months, you do have the option to stop and repay. (On a related note, beneficiaries can enjoy an increase in benefits if they wait until age 70 to start claiming.)

These age limits are subject to change. The Congressional Budget Office (CBO) has worked up the numbers for increasing the benefit age from 65 to 67 for Medicare, for increasing full retirement age from 67 to 70, and for increasing the early eligibility age from 62 to 65. These very hypothetical increases are aimed at decreasing government spending while also encouraging older adults to stay in the workforce longer, generating taxes for these programs.

Even if Congress uses this information from the CBO to make policy changes, it will take time to move yet-to-be-proposed bills through the committee structures. And even if a bill on this topic is passed into law, it will take more time to be put into effect. The CBO report suggests effective dates in the 2030s. But the very fact that this report exists shows that more increases to age requirements are possible, and that today’s work force should not assume that Medicare and Social Security will be in place at the age limits currently in effect.